The Energy Revolution: A Resource Blessing or Resource Curse

Abstract

Massive deposits of shale gas are now potentially accessible, thanks to the development of innovative technologies like fracking and deep water drilling. Despite some clear negatives — water and air pollution near production sites, the risks of deep water drilling, and political opposition to fracking at the local level in the United States and Europe — the promise of plentiful, inexpensive energy and the environmental benefits of burning natural gas rather than coal or oil create powerful incentives to develop natural gas production and transit capacity globally. What are the economic consequences of these activities? Recent research suggests that countries with an abundance of non-renewable resources often suffer from a variety of maladies. Sachs and Warner popularized the concept of the “resource curse” by demonstrating that countries with newfound energy resources tend to become over-dependent on commodity exports and experience comparatively slow growth rates. Their economies also become increasingly centralized, with oligopolistic firms or governments controlling the “commanding heights” of the economy. Other industries suffer from unbalanced regulation and treatment by the public sector as well as from a tendency for the national currency to become overvalued as global demand for oil or other primary export commodities grows. We argue that the infrastructure requirements for transporting natural gas and the time lag between local development and its impact on global markets created by the need to build that infrastructure create a window of opportunity during which shale gas deposits are more likely to generate “resource blessings” than the “resource curse” that has previously haunted many who discovered oil. The geographic dispersion of shale reserves and the heavy reliance on pipelines for transporting gas broaden the positive spillover effects by creating a demand for local infrastructure development and promoting opportunities for local management. Meanwhile, difficulties in transporting natural gas enable local markets to benefit from cheap energy as gas without demand from international markets driving up prices or altering national currency values. As with oil, if the transit capacity of natural gas increases sufficiently to eliminate opportunity for arbitrage the potential for a resource curse will return. Until that point, natural gas will continue to provide a boon to the U.S. economy and other countries that develop newfound reserves.

Keywords: energy, natural gas, fracking, oil

JEL Classification: O3